It’s not unusual for a new president to want to change tax laws – in fact, most of them try. And President-elect Donald Trump is no different. On the campaign trail and in the weeks following his election, Trump has proposed a far-reaching set of tax changes that could have a significant impact on individuals and businesses. As an investor and a taxpayer, you will want to familiarize yourself with what may change in 2017.
Of course, Trump’s tax proposals still have to go through the legislative process, and the ultimate outcomes are as yet unpredictable. Although the Republicans will have control of both houses of Congress, the Democrats still hold enough Senate seats to force compromise. Even within the Republican party, compromise will be required. Trump’s proposals differ in several significant ways from the proposals that House GOP leadership have been touting over the past two years.
In any event, it seems clear that change is coming. Let’s examine some of the key areas covered by Trump’s proposals and compare them to the ideas set forth in the “House Republican Tax Reform Plan.”
PERSONAL AND INVESTMENT TAXES
Trump’s proposals and the GOP roadmap both provide for some fairly significant changes to taxes on ordinary income, investment income, and estates and gifts:
Ordinary income tax rates and brackets – Trump’s proposal for individual income taxes is similar to that proposed in the Republican plan. Both plans would consolidate the current seven tax brackets (with rates ranging from 10% to 39.6%) into three, with rates of 12%, 25%, and 33%. The Republican plan, however, does not identify the income thresholds for each tax bracket, while Trump’s plan sets the thresholds as follows for married couples:
* 12% bracket for the first $75,000 of income
* 25% bracket for income between $75,001 – $225,000
* 33% bracket for income over $225,000
For individuals, the brackets would be 50% of these amounts.
Itemized deductions – Under Trump’s plan, itemized deductions would be capped at $100,000 for singles or $200,000 for joint filers, and personal exemptions would be eliminated. The Republican plan would eliminate all itemized deductions except those for mortgage interest and charitable contributions. The Republican plan also would eliminate the personal exemption.
Standard deduction – Trump’s plan would raise the standard deduction from $6,300 to $15,000 for single filers and from $12,600 to $30,000 for married couples filing jointly. The Republican plan would increase the standard deduction to $12,000 for singles and $24,000 for married couples.
Investment-related taxes – Trump proposes retaining the current three-tier capital gains tax structure, with long-term gains assessed at the 0%, 15%, and 20% rates. (These rates would also apply to qualified dividends.) The three capital gains rates would now correspond directly to the three individual tax brackets, so that those paying the 12% ordinary income rate would pay 0% capital gains, those in the 25% bracket would pay the 15% capital gains rate, and those in the 33% bracket would get the 20% capital gains rate. Trump also advocates eliminating the 3.8% Medicare surtax.
The House Republican plan would allow individuals to exclude 50% of their investment income – capital gains, qualified dividends, and interest income – and then tax the remainder at ordinary income rates. Thus, with ordinary tax rates of 12%, 25%, and 33%, investment income would be taxed at 6%, 12.5%, and 16.5%. The Republican plan would also repeal the 3.8% Medicare surtax.
Alternative Minimum Tax – Trump and House GOP both propose eliminating the Alternative Minimum Tax (AMT).
Estate and gift taxes –Trump has proposed eliminating the estate tax and gift taxes, and coupling this with an elimination of the current “step-up-in-basis” rule for inherited assets. Thus, under Trump’s plan, people who inherit appreciated assets would be liable for capital gains taxes on those assets. The House Republicans have proposed eliminating all federal estate and gift taxes.
In addition to the proposed changes to taxes for individuals, Trump and the House GOP plans both call for significant changes to taxes for businesses. Currently the federal corporate tax rate is 35%; this does not include state and local taxes, which average about 4%, according to the Tax Foundation. (It is important to note, however, that after credits and deductions, most corporations end up paying an “effective” federal tax rate that is significantly lower than 35%.) Trump has proposed reducing the federal corporate income tax rate from 35% to 15%, while the House Republicans’ plan calls for a cut to 20%.
Trump’s and the House GOP’s proposals also call for lowering the tax on income from “pass-through” entities, such as sole proprietorships, partnerships, and S corporations. Income from these types of businesses isn’t taxed at the corporate level and “passes through” to the owners; this income is then taxed at the owners’ individual tax rates. Trump has proposed taxing income from pass-through entities at 15%, and the House GOP plan calls for taxing this income at a maximum of 25%.
WHICH SECTORS COULD BE HELPED – OR HURT?
In addition to the tax law changes described above, Trump has suggested that his administration could make major changes at the regulatory level. Regulatory changes, in conjunction with tax law changes, certainly could create new tailwinds—or headwinds—for various sectors of the economy.
It’s too soon to say, with any certainty, what specific effects the Trump administration might have on various market sectors. But, based on what Trump has proposed, it is possible to identify a few sectors that could be helped or hurt by the new administration’s policies:
* Banking – Bank stocks may do well if the Trump administration and Congress loosen some financial regulations, specifically those related to the Dodd-Frank Act and the Consumer Financial Protection Bureau. Also, Trump’s plan to cut taxes and increase government spending on infrastructure may spur inflation, which, in turn, could lead to higher interest rates, which could help banks.
* Energy – Companies involved in oil drilling, gas pipeline construction, and coal processing may benefit from a looser regulatory environment.
* Defense – Defense contractors could benefit if Trump makes good on his proposals to modernize U.S. military fleets.
* Infrastructure – Trump has proposed a large investment in rebuilding the country’s roads, bridges, and other elements of our infrastructure. If this occurs, heavy equipment manufacturers, as well as companies involved in commodities, may benefit.
* Alternative energy – Compared with the Obama administration, the Trump administration may be less supportive of solar, wind, and other forms of alternative energy.
* Healthcare information technology – Companies that provide healthcare information technology may take a hit if Trump and the Republican-led Congress roll back the Affordable Care Act (ACA). Part of the ACA mandates the adoption of more advanced information technology systems by hospitals and other healthcare providers.
* Retail – Trump’s opposition to the North American Free Trade Agreement (NAFTA) and the proposed Trans-Pacific Partnership (TPP) could end up being detrimental to retail companies that have global supply chains.
MONITORING DEVELOPMENTS IN WASHINGTON
It is too early to know just what changes will ultimately be enacted under a Trump administration. Once the legislative process starts, there are sure to be some compromises. At The Retirement Network, we will be closely monitoring the situation in Washington, and we will keep you informed about developments that could affect your tax situation and investment strategy.
The opinions voiced are for general information only. They are not intended to provide specific advice or recommendations for any individual and do not constitute an endorsement by NPC. To determine which investments may be appropriate for you, consult with your financial professional. Please remember that investment decisions should be based on an individual’s goals, time horizon, and tolerance for risk. NPC does not provide tax or legal advice.